Intermediate financial accounting

INTERMEDIATE : PAPER - FINANCIAL ACCOUNTING STUDY NOTES The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 INTERMEDIATE First Edition : February 2013 Revised Edition : May 2013 Published by : Directorate of Studies The Institute of Cost Accountants of India (ICAI) CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 Printed at : Repro India Limited Plot No 02, T.T.C MIDC Industrial Area, Mahape, Navi Mumbai 400 709, India Website : www.reproindialtd.com Copyright of these Study Notes is reserved by the Insitute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof Syllabus Syllabus Structure The syllabus comprises the following topics and study weightage A B C D E F Generally Accepted Accounting Principles & Accounting Systems Preparation of Accounts Control of Accounting Systems Accounting in Service Sectors Accounting for Special Transactions Accounting for Banking, Electricity and Insurance Companies F 20% 10% 30% 10% 10% 20% 20% A 10% B 30% E 20% D C 10% 10% ASSESSMENT STRATEGY There will be written examination paper of three hours OBJECTIVES To gain understanding and to provide working knowledge of accounting concepts, detailed procedures and documentation involved in financial accounting system Learning Aims The syllabus aims to test the student’s ability to:  U nderstand the framework of accounting systems and the Generally Accepted Accounting Principles  P repare necessary financial statements related to different business entities  C onstruct financial statements for understandability and relevance of stakeholders Skill set required Level B: Requiring the skill levels of knowledge, comprehension, application and analysis Section A : Generally Accepted Accounting Principles & Accounting Systems Accounting Process Accounting Standards Reconciliation Statements Section B : Preparation of Accounts  Accounting for Depreciation, Depletion, Amortization and Impairment of Assets Preparation of Financial Statements Partnership Branch and Departmental Accounts Royalty and Hire-Purchase Section C : Control of Accounting Systems Self-Balancing Ledgers and Sectional Balancing Ledgers Section D : Accounting in Service Sectors 10 Accounting in Service Sectors Section E : Accounting for Special Transactions 11 Accounting for Special Transactions Section F : Accounting for Banking, Electricity and Insurance Companies Banking , Electricity and Insurance Companies 12  10% 30% 10% 10% 20% 20% SECTION A: GENERALLY ACCEPTED ACCOUNTING PRINCIPLES & ACCOUNTING SYSTEMS [10 MARKS] Accounting Process (a)  Theoretical framework (meaning, scope and usefulness of Accounting; Accounting principles, concepts and convention) (b)  Accounting Life Cycle (ALC) – From Investment of Capital (Cash) to Realization of Revenue (Cash) (c)  Capital and Revenue transactions- capital and revenue expenditures, capital and revenue receipts (d)  Measurement, valuation and accounting estimates Double entry system, books of prime entry, subsidiary books, cash book, ledgers, trial balance (e)  Rectification of errors, opening entries, transfer entries, adjustment entries, closing entries Accounting Standards (a) AS-1: Disclosure of Accounting Policies (b) AS-2: Valuation of Inventories (c) AS-4: Contingencies and Events Occurring after the Balance Sheet Date (d) AS-5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (e) AS-10: Accounting for Fixed Assets (f) AS-11: The Effects of Changes in Foreign Exchange Rates (g) AS-15: Employee Benefits (h) AS-16: Borrowing Costs Reconciliation Statements (a) Bank Reconciliation Statements (b) Stock Reconciliation Statements (c) Receivables / Payables Reconciliation Statement SECTION B: PREPARATION OF ACCOUNTS [30 MARKS]  Accounting for Depreciation, Depletion, Amortization and Impairment of Assets (a)  Depreciation Policy, Depletion, Amortization and Impairment of Assets (b)  Depreciation Accounting (AS – 6); Impairment of Assets (AS -28) (c)  Methods, computation and accounting treatment Preparation of Financial statements : (a) Of Profit-making organizations: (i) Preparation of Profit & Loss Account and Balance Sheet (ii)  Preparation of Cash Flow Statement (AS – 3) (iii)  Accounting treatment of bad debts, reserve for bad and doubtful debts, provision for discount on debtors and provision for discount on creditors (b) Of Not-for-Profit organizations : (i) Preparation of Receipts and Payments Account (ii)  Preparation of Income and Expenditure Account (iii) Balance Sheet (c)  Under single entry system including conversion of single entry into double entry system : (i)  Concept of single entry system, conversion of single entry system into double entry system of accounting (ii)  Application of accounting ratios for preparation of accounts under single entry system Partnership (a) Past adjustments and guarantee, profit & loss appropriation account (b) Admission, Retirement, Death, Treatment of Joint Life Policy (c) Dissolution of partnership firms including piece meal distribution (d) Amalgamation of partnership firms, Conversion of partnership firm into a company and sale of partnership firm to a company Royalty and Hire Purchase (a) Accounting from the point of view of various parties (b) Possession and repossession in case of default in payments Branch and Departmental Accounts (a) Branch Accounts-Debtors system, Stock & Debtors system, Foreign Branch (b) Departmental Accounts: Trading Account; Profit & Loss Account (c) Calculation of net profit of various departments and allocation of expenses on the basis of suitable base, treatment of shortages, treatment of unrealized profit (d) Preparation of General Profit & Loss Account and Balance Sheet SECTION C : CONTROL OF ACCOUNTING SYSTEMS [10 MARKS] Self-Balancing Ledger and Sectional Balancing Ledgers (a) Self- Balancing Ledgers (b) Sectional Balancing Ledgers SECTION D: ACCOUNTING IN SERVICE SECTOR [10 MARKS] 10 Accounting for Service Sectors (a) Revenue Recognition (AS-9) (b) Construction Companies (AS 7), Project Accounting (c) Service sectors such as Software, ITES, Telecommunication, Entertainment, Hospital, Educational Institutions SECTION E: ACCOUNTING FOR SPECIAL TRANSACTIONS [20 MARKS] 11 Accounting for Special Transactions (a) Bills of Exchange, Consignment, Joint venture, Sale of goods on approval or return basis, Account Current (b) Investment Accounts (AS – 2, 13) (c) Insurance Claim ( Loss of Stock and Loss of profit) SECTION F: ACCOUNTING FOR BANKING, INSURANCE AND ELECTRICITY COMPANIES [20 MARKS] 12 Banking, Electricity and Insurance companies (a) Accounts of a Banking Company (as per Banking Companies Regulation Act) (b) Accounts of an Electricity Company (as per Electricity Act) (c) Accounts of Insurance Companies (as per Insurance Act) including Stock Valuation Content Study Note : Accounting Process 1.1 Introduction 1.1 1.2 Definitions 1.2 1.3 Accounting Cycle 1.5 1.4 Objectives of Accounting 1.5 1.5 Basic Accounting Terms 1.9 1.6 Generally Accepted Accounting Principles 1.13 1.7 Accounting Concepts and Conventions 1.14 1.8 Events and Transactions 1.20 1.9 Voucher 1.21 1.10 The Concepts of “Account”, “Debit” and “Credit” 1.22 1.11 Types of Accounts 1.22 1.12 The Accounting Process 1.23 1.13 Accounting Equation 1.29 1.14 Accrual Basis & Cash Basis of Accounting 1.31 1.15 Capital & Revenue Transactions 1.35 1.16 Accounting Standards 1.43 1.17 Double Entry System, Books of Prime Entry, Subsidiary Books 1.47 1.18 Trial Balance 1.65 1.19 Measurement, Valuation & Accounting Estimates 1.73 1.20 Opening entries, Closing entries, Transfer entries and Rectification entries 1.89 Study Note : Accounting Standards 2.1 AS-1: Disclosure of Accounting Policies 2.3 2.2 AS-2 : Valuation of Inventories 2.6 2.3 AS-4 : Contingencies and Events Occuring after The Balance Sheet Date 2.13 2.4 AS-5 : Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies 2.20 2.5 AS-10 : Accounting For Fixed Assets 2.24 2.6 AS-11 : The Effects of Changes in Foreign Exchange Rates 2.29 2.7 AS-15 : Employee Benefits 2.34 2.8 AS-16 : Borrowing Costs 2.37 Study Note : Reconciliation Statements 3.1 Bank Reconciliation 3.1 3.2 Receivable Reconciliation 3.18 3.3 Payable Reconciliation 3.19 3.4 Stock Reconciliation 3.20 Study Note : Accounting for Depreciation 4.1 Introduction 4.1 4.2 Certain Useful Terms 4.2 4.3 Nature of Depreciation 4.2 4.4 Causes of Depreciation 4.2 4.5 Characteristics of Depreciation 4.3 4.6 Objective of and Necessity for providing Depreciation 4.3 4.7 Measurement of Depreciation 4.4 4.8 Methods of Charging Depreciation 4.4 4.9 Provision for Depreciation Account 4.13 4.10 Disposal of an asset 4.14 4.11 Profit or Loss on sale of assets - Method of Depreciation Calculation 4.16 4.12 Change of Method - Prospective and Retrospective 4.17 4.13 Application of AS - Depreciation Accounting 4.22 4.14 Application of AS 10 - Accounting for Fixed Asset 4.24 4.15 Application of AS 28 - Impairment of Assets 4.26 Study Note : Preparation of Final Accounts 5.1 Introduction 5.1 5.2 Preparation of Financial Statements 5.1 5.3 Bad Debts 5.69 5.4 Preparation of Financial Statement of Non-Trading Concern 5.83 5.5 Preparation of Financial Statement under Single Entry System including Conversion of Single Entry into Double Entry System 5.112 Study Note : Partnership 6.1 Appropriation of Profits 6.2 Admission of Partner 6.1 6.27 6.3 Retirement of Partner 6.60 6.4 Death of Partner 6.101 6.5 Dissolution of A Partnership Firm 6.118 6.6 Insolvency of a Partner 6.134 6.7 Amalgamation of Firms and Conversion to a Company 6.170 6.8 Conversion or Sale of a Partnership Firm to a Company 6.189 Study Note : Royalty and Hire Purchase 7.1 Royalty Accounting 7.2 Hire Purchase and Installment Purchase System 7.1 7.20 Study Note : Branch and Departmental Accounts 8.1 Branch Accounts 8.2 Departmental Accounts 8.1 8.48 Study Note : Self Balancing Ledger and Sectional Balancing Ledgers 9.1 Self Balancing Ledger 9.2 Sectional Balancing Ledger 9.1 9.25 Study Note 10 : Accounting for Service Sectors 10.1 Revenue Recognition (AS-9) 10.1 10.2 Construction Companies ( AS-7) 10.7 10.3 Project Accounting 10.12 10.4 Accounting for Service Sectors 10.13 10.4.1 Accounting for Software Companies 10.13 10.4.2 Accounting for ITES 10.19 10.4.3 Accounting for Telecommunication Sector 10.20 10.4.4 Accounting for Entertainment Services 10.23 10.4.5 Accounting for Hospitals 10.25 10.4.6 Accounting in Educational Institutions 10.28 Study Note 11 : Accounting for Special Transactions 11.1 Bills of Exchange 11.2 Consignment Accounting 11.1 11.27 11.3 Joint Venture Account 11.47 11.4 Sales of Goods on Approval or Return Basis 11.61 11.5 Account Current 11.67 11.6 Investment Account 11.73 11.7 Insurance Claim (Loss of Stock and Loss of Profit) 11.83 Study Note 12 : Banking, Electricity and Insurance companies 12.1 Accounting of Banking Companies 12.1 12.2 Accounting of Electricity Companies 12.43 12.3 Accounting of Insurance Companies 12.73 Study Note - ACCOUNTING PROCESS This Study Note includes 1.1 Introduction 1.2 Definitions 1.3 Accounting Cycle 1.4 Objectives of Accounting 1.5 Basic Accounting Terms 1.6 Generally Accepted Accounting Principles 1.7 Accounting Concepts and Conventions 1.8 Events and Transactions 1.9 Voucher 1.10 The Concepts of “Account”, “Debit” and “Credit” 1.11 Types of Accounts 1.12 The Accounting Process 1.13 Accounting Equation 1.14 Accrual Basis & Cash Basis of Accounting 1.15 Capital & Revenue Transactions 1.16 Accounting Standards 1.17 Double Entry System, Books of Prime Entry, Subsidiary Books 1.18 Trial Balance 1.19 Measurement, Valuation & Accounting Estimates 1.20 Journal Proper – Opening entries, Closing entries, Transfer entries and Rectification entries 1.1 INTRODUCTION Business is an economic activity undertaken with the motive of earning profits and to maximize the wealth for the owners Business cannot run in isolation Largely, the business activity is carried out by people coming together with a purpose to serve a common cause This team is often referred to as an organization, which could be in different forms such as sole proprietorship, partnership, body corporate etc The rules of business are based on general principles of trade, social values, and statutory framework encompassing national or international boundaries While these variables could be different for different businesses, different countries etc., the basic purpose is to add value to a product or service to satisfy customer demand The business activities require resources (which are limited & have multiple uses) primarily in terms of material, labour, machineries, factories and other services The success of business depends on how efficiently and effectively these resources are managed Therefore, there is a need to ensure that the businessman tracks the use of these resources The resources are not free and thus one must be careful to keep an eye on cost of acquiring them as well As the basic purpose of business is to make profit, one must keep an ongoing track of the activities undertaken in course of business Two basic questions would have to be answered: (a) What is the result of business operations? This will be answered by finding out whether it has made profit or loss (b) What is the position of the resources acquired and used for business purpose? How are these resources financed? Where the funds come from? The answers to these questions are to be found continuously and the best way to find them is to record all the business activities Recording of business activities has to be done in a scientific manner so that they reveal correct outcome The science of book-keeping and accounting provides an effective solution It is a branch of social science This study material aims at giving a platform to the students to understand FINANCIAL ACCOUNTING I 1.1 Accounting Process basic principles and concepts, which can be applied to accurately measure performance of business After studying the various chapters included herein, the student should be able to apply the principles, rules, conventions and practices to different business situations like trading, manufacturing or service Over years, the art and science of accounting has evolved together with progress of trade and commerce at national and global levels Professional accounting bodies have been doing intensive research to come up with accounting rules that will be applicable Modern business is certainly more complex and continuous updating of these rules is required Every stakeholder of the business is interested in a particular facet of information about the business The art and science of accounting helps to put together these requirements of information as per universally accepted principles and also to interpret the results It is interesting to note that each one of us has an accountant hidden in us We see our parents keep track of monthly expenses We make a distinction between payment done for monthly grocery and that for buying a house or a car We understand that while grocery is a monthly expense and buying a house is like creating a resource that has indefinite future use The most common accounting record that each one of us knows is our bank passbook or a bank statement, which the bank maintains for us It tracks each rupee that we deposit or withdraw from our account When we go to supermarket to buy something, the cashier at the counter will record things we buy and give us a ‘bill’ or ‘cash memo’ These are source documents prepared for the transaction between the supermarket and us While these are simple examples, there could be more complex business activities A good working knowledge of keeping records is therefore necessary Professional accounting bodies all over the world have been functioning with the objective of providing this body of knowledge These institutions are engaged in imparting training in the field of accounting Let us start with some basic definitions, concepts, conventions and practices used in development of this art as well as science 1.2 DEFINITIONS In order to understand the subject matter with clarity, let us study some of the definitions which depict the scope, content and purpose of Accounting The field of accounting is generally sub-divided into: (a) Book-keeping (b) Financial Accounting (c) Cost Accounting and (d) Management Accounting Let us understand each of these concepts (a) Book-keeping The most common definition of book-keeping as given by J R Batliboi is “Book-keeping is an art of recording business transactions in a set of books.” As can be seen, it is basically a record keeping function One must understand that not all dealings are, however, recorded Only transactions expressed in terms of money will find place in books of accounts These are the transactions which will ultimately result in transfer of economic value from one person to the other Book-keeping is a continuous activity, the records being maintained as transactions are entered into This being a routine and repetitive work, in today’s world, it is taken over by the computer systems Many accounting packages are available to suit different business organizations It is also referred to as a set of primary records These records form the basis for accounting It is an art because, the record is to be kept in such a manner that it will facilitate further processing and reporting of financial information which will be useful to all stakeholders of the business (b) Financial Accounting It is commonly termed as Accounting The American Institute of Certified Public Accountants defines Accounting as “an art of recoding, classifying and summarizing in a significant manner and in terms 1.2 I FINANCIAL ACCOUNTING Accounting of Insurance Companies Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of net premium for marine insurance Provision for taxation account Date Particulars 31.3.2012 To Bank A/c (taxes paid) 31.3.2012 To Balance c/d ` Date 1.4.2011 60,000 31.3.2012 Particulars By Balance b/d ` ` 85,000 By P & L A/c 99,138 1,24,138 1,84,138 1,84,138 Illustration 20 From the following information as on 31st March, 2012, prepare the Revenue Accounts of Sagar Bhima Co Ltd engaged in Marine Insurance Business: Particulars I II III Premium : Received Receivable – 1st April, 2011 – 31st March, 2012 Premium paid Payable – 1st April, 2011 – 31st March, 2012 Claims : Paid Payable – 1st April, 2011 – 31st March, 2012 Received Receivable – 1st April, 2011 – 31st March, 2012 Commission : On Insurance accepted On Insurance ceded Direct Business (`) Re-insurance (`) 24,00,000 1,20,000 1,80,000 2,40,000 – – 3,60,000 21,000 28,000 – 20,000 42,000 16,50,000 95,000 1,75,000 – – – 1,25,000 13,000 22,000 1,00,000 9,000 12,000 1,50,000 – 11,000 14,000 Other expenses and income: Salaries – ` 2,60,000; Rent, Rates and Taxes – ` 18,000; Printing and Stationery – ` 23,000; Indian Income Tax paid – ` 2,40,000; Interest, Dividend and Rent received (net) – ` 1,15,500; Income Tax deducted at source – ` 24,500; Legal Expenses (Inclusive of ` 20,000 in connection with the settlement of claims) – ` 60,000; Bad Debts – ` 5,000; Double Income Tax refund – ` 12,000; Profit on Sale of Motor car ` 5,000 Balance of Fund on 1st April, 2011 was ` 26,50,000 including Additional Reserve of ` 3,25,000 Additional Reserve has to be maintained at 5% of the net premium of the year Solution: In exercise of the powers conferred by Section 114A of the Insurance Act, 1938 (4 of 1938), the Insurance Regulatory and Development Authority in consultation with the Insurance Advisory Committee prescribed the new formats for the financial statements of Insurance Companies i.e preparation of Financial Statements and Auditor’s Report of Insurance Companies Regulations, 2000 Therefore, the above revenue account can be prepared as: 12.148 I FINANCIAL ACCOUNTING Form B – RA (Prescribed by IRDA) Revenue Account for the year ended 31st March, 2012 Marine Insurance Business Particulars Schedule Premiums earned (net) Change in provision for unexpired risk (` 26,93,250 – ` 26,50,000) Interest, Dividends and Rent – Gross Double Income Tax refund Profit on sale of motor car Total (A) Claims incurred (net) Commission Operating expenses related to Insurance business Bad debts Indian and Foreign taxes Total (B) Profit from Marine Insurance business ( A-B) Current Year ` 25,65,000 (-)43,250 Previous Year ` 1,15,500 12,000 5,000 26,54,250 17,81,000 1,47,000 3,41,000 5,000 2,40,000 25,14,000 1,40,250 Schedules forming part of Revenue Account Schedule –1 Premiums earned (net) Premiums from direct business written Less: Premium on reinsurance ceded Total Premium earned (net) Schedule – Claims incurred (net) Schedule – Commission paid Direct Add: Re-insurance accepted Less: reinsurance ceded Schedule – Operating expenses related to insurance business Employees’ remuneration and welfare benefits Rent, Rates and Taxes Printing and Stationery Legal and Professional charges Current Year Previous Year ` ` 28,27,000 2,62,000 25,65,000 17,81,000 1,50,000 11,000 14,000 1,47,000 2,60,000 18,000 23,000 40,000 3,41,000 FINANCIAL ACCOUNTING I 12.149 Accounting of Insurance Companies Working Notes: Total Premium Income Direct Re-insurance Received Add: Receivable on 31 March, 2012 st Less: Receivable on April, 2011 st ` ` 24,00,000 3,60,000 1,80,000 28,000 25,80,000 3,88,000 1,20,000 21,000 24,60,000 3,67,000 Total premium income 24,60,000 + 3,67,000 = 28,27,000 Premium Paid Paid Add: Payable on 31st March, 2012 2,40,000 42,000 2,82,000 Less: Payable on 1st April, 2011 20,000 2,62,000 Claims Paid Direct Business Re-insurance Legal Expenses 16,50,000 1,25,000 20,000 17,95,000 Less: Re-insurance claims received 1,00,000 16,95,000 Claims outstanding as on 31st March, 2012 Direct Re-insurance 1,75,000 22,000 1,97,000 Less: Recoverable from Re-insurers on 31st March, 2012 12,000 1,85,000 Claims outstanding as on 1st April, 2011 Direct 95,000 Re-insurance 13,000 1,08,000 Less: Recoverable from Re-insurers on 1st April, 2011 9,000 99,000 Expenses of Management Salaries 2,60,000 Rent, Rates and taxes 18,000 Printing and Stationery 23,000 Legal Expenses 40,000 3,41,000 12.150 I FINANCIAL ACCOUNTING Illustration 21 From the following balances extracted from the books of Our General Insurance Company Limited as on 31.3.2011, you are required to prepare Revenue Accounts in respect of fire and marine insurance business for the year ended 31.3.2011 and a Profit and Loss Account for the same period : Particulars Directors’ Fees Dividend Received Provision for Taxation (as on 1.4.10) ` Particulars ` 80,000 Interest Received 19,000 1,00,000 Fixed Assets (1.4.2010) 90,000 85,000 Income-tax Paid during the year 60,000 Particulars Fire (`) Marine (`) Outstanding Claims on 1.4.2010 28,000 7,000 Claims Paid 1,00,000 80,000 Reserve for Unexpired Risk on 1.4.2010 2,00,000 1,40,000 Premium Received 4,50,000 3,30,000 Agent’s Commission 40,000 20,000 Expenses o f Management 60,000 45,000 25,000 15,000 Re-insurance Premium (Dr.) The following additional points are also to be taken into account : (a) Depreciation on Fixed Assets to be provided at 10% p.a (b) Interest accured on Investments ` 10,000 (c) Closing Provision for taxation on 31.3.2011 to be maintained at ` 1,24,138 (d) Claims outstanding on 31.3.2011 were : fire insurance ` 10,000; marine insurance ` 15,000 (e) Premium outstanding on 31.3.2011 were : fire insurance ` 30,000; marine insurance ` 20,000 (f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect of fire and marine insurance respectively (g) Expenses of management due on 31.3.2011 were ` 10,000 for fire insurance and ` 5,000 in respect of marine insurance FINANCIAL ACCOUNTING I 12.151 Accounting of Insurance Companies Solution: Form B - RA (Prescribed by IRDA) Name of the Insurer : Our General Insurance Company Limited Registration No and Date of Registrageion with IRDA Revenue Account for the year ended 31st March, 2011 Particulars Premiums earned – net Claims Incurred (Net) Commission Operating Expenses related to Insurance Business Operating Profit / (Loss) from Fire and Marine Insurnace Business C = (A – B) Total (A) Schedule Total (B) Fire (`) 4,27,500 4,27,500 82,000 40,000 70,000 Marine (`) 1,40,000 1,40,000 88,000 20,000 50,000 1,92,000 1,58,000 2,35,500 (18,000) Fire (`) 4,80,000 25,000 4,55,000 (27,500) 4,27,500 Marine (`) 3,50,000 15,000 3,35,000 (1,95,000) 1,40,000 Fire (`) 1,00,000 10,000 1,10,000 28,000 82,000 Marine (`) 80,000 15000 95,000 7,000 88,000 Fire (`) 40,000 40,000 Marine (`) 20,000 20,000 Fire (`) 60,000 10,000 70,000 Marine (`) 45,000 5,000 50,000 Schedules Forming Part of Financial Statements Schedule 1 : Premium Earned (Net) Particulars Premium from direct business written (Note 2) Less : Premium on re-insurnace ceded Net Premium Adjustment for change in reserve for unexpired risks (Note 1) Total Premium Earned (Net) Schedule 2 : Claims Incurred (Net) Particulars Claims Paid Add : Claims outstanding at the end of the year Less : Claims outstanding at the begining of the year Schedule 3 : Commission Particulars Agents’ Commission Schedule 4 : Operating Expenses Related to Insurance Business Particulars Expenses on Management paid Add : Outstanding 12.152 I FINANCIAL ACCOUNTING Form B - PL (Prescribed by IRDA) Name of the Insurer : Our General Insurance Company Limited Registration No and Date of Registrageion with IRDA Profit and Loss Account for the year ended 31st March, 2011 Particulars Operating Profit/(Loss) (a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Insurance Income from Investments — Interest, Dividend and Rent — Gross Other Income (to be specified) Provision (other than Taxation) Depreciation Other Expenses — Directors’ Fees Schedule ` 2,35,000 (18,000) — 1,29,000 — 3,46,500 Total (A) 9,000 80,000 89,000 2,57,500 99,138 Total (B) Profit Before Tax (A – B) Provision for Taxation (Note 4) Profit after Tax 1,58,362 Working Notes : (1) Adjustment for Change in Reserve for Unexpired Risk Particulars Opening Balance of Reserve for Unexpired Risk Closing Balance of Reserve for Unexpired Risk Fire (`) 2,00,000 *2,27,500 (27,500) Marine (`) 1,40,000 **3,35,000 (1,95,000) Fire (`) Marine (`) 4,50,000 3,30,000 30,000 20,000 4,80,000 3,50,000 * 50% of ` 4,55,000 (Net Premium) ** 100% of ` 3,35,000 (Net Premium) (2) Premiums from Direct Business Particulars Premium received during the year Add : Outstanding on 31st March, 2011 (3) Provision for Taxation Account Dr Cr Date Particulars 31.3.2011 To Bank A/c (Taxes paid) To Balance c/d ` Date 60,000 1.4.2010 1,24,138 31.3.2011 1,84,138 Particulars ` By Balance b/d 85,000 By Profit and Loss A/c 99,138 1,84,138 FINANCIAL ACCOUNTING I 12.153 Accounting of Insurance Companies Illustration 22: The following balances as at 31st Dec, 2012 have been extracted from the books of accounts of the General Insurance Co Ltd Particulars Fire Fund A/c Marine Fund A/c Particulars Expenses Management: 9,34,000 Fire Marine Miscellaneous 3,68,000 Miscellaneous Expenses ` ` 6,49,200 74,800 1,34,600 13,340 Miscellaneous Fund A/c 1,36,000 Miscellaneous Income 840 Additional Reserve (Fire) 2,40,000 Share Transfer Fees 440 Previous: Fire Marine Miscellaneous Re – Insurance Premium paid and outstanding: Fire Marine Miscellaneous Claims Paid: Fire Marine Miscellaneous Claims recovered from ReInsurance: Fire Marine Miscellaneous Share capital Claims intimated but not paid as on 31.12.2011 : Fire Marine Miscellaneous Commission on Re- insurance accepted : Fire Marine Miscellaneous Stock and shares Investment Reserves Amount due to Re- Insurer Amount due from Re- Insurer 12.154 I FINANCIAL ACCOUNTING 25,13,500 3,74,000 4,21,600 97,200 15,000 29,600 6,94,000 1,08,000 2,01,200 General Reserve Audit Fees 8,000 Director’s Fees 6,000 Rates & Taxes 7,200 24,600 6,800 12,600 16,00,000 Rents 77,200 32,000 29,000 6,00,000 18,800 Profits and Loss A/c 92,800 Interest and dividend outstanding 10,800 97,200 17,400 18,900 25,200 Mortgage in India 4,25,400 Income from Investment 24,600 Income tax on income from investment 19,200 Govt securities deposited with Reserve Bank 8,48,000 1,74,800 45,880 7,35,600 Sundry Creditors Commission on Re- insurance Ceded : Fire Marine Miscellaneous 25,740 Indian govt securities 28,47,200 State Govt Securities 4,97,000 Agents’ Balance 1,57,280 64,800 12,400 6,260 Outstanding premium 29,500 Cash with Bank on Current A/c 3,72,800 Cash in Hand 3,280 Commission on Direct Business: Fire : 3,29,000 Marine : 30,800 Miscellaneous : 57,400 It is proposed that out of the profit ` 2,00,000 be transferred to General Reserve and that a dividend @12% be provided for after making a provision of ` 4,00,000 for Income Tax Claims intimated but not paid on 31.12.2012 were as under: Fire ` 1,10,800 ; Marine ` 25,400 ; Miscellaneous ` 38,800 Create 40% provision for unexpired risks in case of fire and miscellaneous insurance and 100% provision in case of marine business Prepare Revenue Account, Profit and Loss Account and the Balance Sheet of the company Solution: Form B- RA Name of the Insurer: General Insurance Co Ltd Registration No and Date of Registration with IRDA …………………………………… Revenue Account For the year ended 31st December,2012 Particulars Schedule Premium Earned (Net) Change in provision for unexpired risks Profit/ Loss on sale of Investment Others: Others Income Interest, Dividend Rent – Gross Total (A) Claims Incurred (Net) Commission Fire Marine Current Previous Current Previous Year (`) Year (`) Year (`) Year(`) 24,16,300 3,59,000 (-) 32,520 9,000 Miscellaneous Current Previous Year (`) Year (`) (-) 20,800 - - - - - 3,92,000 - - - 23,83,780 7,03,000 3,61,400 3,68,000 94,600 35,800 3,78,200 1,98,400 70,040 FINANCIAL ACCOUNTING I 12.155 Accounting of Insurance Companies Operating Expenses related Insurance Business Total (B) Operating Profit/Loss from Fire / Marine / Misc (C) = (A) – (B) Appropriations : Transfer to shareholders’ A/c Transfer to Catastrophe Reserve Transfer to Other Reserves 6,49,200 74,800 1,34,600 17,13,600 6,70,000 2,05,200 1,62,800 4,03,040 (-) 31,840 - - - - - - 6,70,000 1,62,800 (-) 31,840 Form B-PL Name of the Insurer: General Insurance Co Ltd Registration No and Date of Registration with IRDA………………………… Profit and Loss Account For the year ended 31st Dec 2012 Particulars Operating Profit/Loss (a) Fire (b) Marine (c) Miscellaneous Income from Investment Other Incomes Miscellaneous Income Share Transfer Fees Total (A) Provisions (other than Taxation) (a) for Diminution Value (b) for Doubtful Debts (c) Others (to be specified) Other Expenses (a) Expenses other than those related to Insurance business (b) Bad Debts written-off (c) Others (to be specified) Total (B) Profit before Tax (c)= (A)-(B) Less: Provision for Taxation Profit after Tax Add: Balance of Profit/Reserve/Surplus brought forward Appropriations Transfer to General Reserve Proposed Dividend (@12% of ` 16,00,000) 12.156 I FINANCIAL ACCOUNTING ` 840 440 Amount ` 6,70,000 1,62,800 (-)31,840 1,74,800 1,280 9,77,040 — — — — — 51,340 51,340 9,25,880 4,00,000 5,25,880 92,800 6,18,680 2,00,000 1,92,000 3,92,000 2,26,680 Form-B-BS Name of the Insurer: General Insurance Co Ltd Registration No and Date of Registration with IRDA……………………… Balance Sheet as at 31st Dec.2012 Particulars Schedule Sources of Fund Share Capital Reserves & Surplus Fair Value Charge A/c Borrowings Total (A) Applications of Funds Investments Loans Fixed assets Current Assets: -Cash and Bank Balance -Advance and Other Assets Less: Current Liabilities Provisions Miscellaneous Expenditure Debit Balance in P&L A/c 16,00,000 10,26,680 4,25,400 30,52,080 10 41,05,000 8,48,000 - 11 12 3,76,080 2,62,660 55,91,740 (-)2,25,340 (-)23,14,320 30,52,080 30,52,080 13 15 Total Current Year ` Previous Year ` Schedules forming part of Financial Statements Particulars Schedule I-Premiums Earned Premiums from Direct Business Less: Premium on Re-insurance Schedule 2-Claims incurred (Net) Claims Paid Less: Claims for Re-insurance Add: Outstanding Claims as on 31.12.2012 Less: Outstanding Claims as on 1.1.2012 Schedule 3-Commission Commission on Direct Business Add: Commission on Re-insurance Accepted Fire Insurance Marine Insurance ` ` Miscellaneous Insurance ` 25,09,500 97,200 24,12,300 3,74,000 15,000 3,89,000 4,21,600 29,600 3,92,000 6,94,000 24,600 6,69,400 1,10,800 7,80,200 77,200 7,03,000 1,08,000 6,800 1,01,200 25,400 1,26,600 32,000 94,600 2,01,200 12,600 1,88,600 38,800 2,27,400 29,000 1,98,400 3,29,000 97,200 4,26,200 30,800 17,400 55,800 57,400 18,900 70,040 FINANCIAL ACCOUNTING I 12.157 Accounting of Insurance Companies Schedule 4-Operating Expenses Expenses of Management Schedule 5-Share Capital Authorised Capital………… Equity Shares of…………………………….each Issued CapitalEquity Shares of `… each Called up/ Paid-up Capital Equity Shares of `….each Schedule 6-Reserves & Surplus Capital Reserve Capital Redemption Reserve Securities Premium General Premium General Reserve Additions Less: (Dr.)Bal of P&L A/c Utilised for buy-back Profit & Loss A/c Schedule 7-Borrowings Debenture/Bonds Bonus Financial Institutions Others Schedule 8-Investments Government Securities deposited with RBI Indian Govt Securities State Govt Securities Stock & Shares Other Investments Schedule – Loans Security-wise Mortgage in India Borrower-wise Performance-wise Maturity-wise 12.158 I FINANCIAL ACCOUNTING 6,49,200 74,800 1,34,600 ` 16,00,000 16,00,000 ` 6,00,000 2,00,000 8,00,000 - ` - 8,00,000 2,26,680 10,26,680 ` Nil ` 7,35,600 28,47,200 4,97,000 25,200 41,05,000 ` 8,48,000 8,48,000 Schedule 10 – Fixed Assets NIL Schedule 11 – Cash & Bank Balance Cash in hand Cash at Bank Money at call and short notice Others 3,72,800 3,280 3,76,080 Schedule 12 – Other Current Assets Advances Income-Tax on Investment Other Assets Accrued Interest & Dividend Outstanding Premium Agent’s balance Amount due from Re-insurer 45,880 10,800 29,500 1,57,280 19,200 2,62,660 Schedule 13 – Current Liabilities Due to Re-insurer Sundry Creditors Claims Outstanding 24,600 25,740 1,75,000 2,25,340 Schedule 14 – Provisions Reserve for Unexpired risk Additional Reserve Prov for Taxation Proposed Dividend 14,82,320 2,40,000 4,00,000 1,92,000 23,14,320 Schedule 15 – Misc Expenditure NIL Workings: Fire (`) Provision for change in Unexpired Risk As on 1.1.2012 Less: as on 31.12.2012 Expenses debited to P & L A/c Rent Rates & Taxes Audit Fees Director’s Fees Misc Expenses 9,34,000 9,66,520 (-)32,520 Marine (`) Miscellaneous (`) 3,68,000 3,59,000 9,000 1,36,000 1,56,800 (-)20,800 ` 18,800 7,200 8,000 6,000 11,340 51,340 FINANCIAL ACCOUNTING I 12.159 Note Note Note ... between Management Accounting and Financial Accounting The significant difference between Management Accounting and Financial Accounting are : Management Accounting Management Accounting is primarily... content and purpose of Accounting The field of accounting is generally sub-divided into: (a) Book-keeping (b) Financial Accounting (c) Cost Accounting and (d) Management Accounting Let us understand... Generally Accepted Accounting Principles & Accounting Systems Preparation of Accounts Control of Accounting Systems Accounting in Service Sectors Accounting for Special Transactions Accounting for